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Cisco Systems, Inc. (CSCO) Bulls Keep Charging -- But Why?

CSCO's at-the-money April 2014 21-strike call is active today

by 12/17/2013 11:12 AM
Stocks quoted in this article:

Cisco Systems, Inc.'s (NASDAQ:CSCO) April 2014 21-strike call is off to a fast start this morning. Of the roughly 66,000 contracts that have traded in the networking name's options pits, close to one-third has traded at this single at-the-money strike.

Getting into the specifics, nearly 20,000 contracts -- including a sweep of 12,240 -- have changed hands at the aforementioned call. The majority traded off the ask price, and volume exceeds open interest, suggesting buy-to-open activity. This theory is shared by Trade-Alert, as well.

By purchasing the Cisco calls to open, this morning's speculators believe the shares -- currently perched just below the strike price at $20.97 -- will make a move higher before April 2014 options expiration. Specifically, in order to profit, they need the stock to topple $21.97, which is the strike price plus the volume-weighted average price (VWAP) of $0.97. On the other hand, if the shares expire below the strike price, then call buyers who have held onto their positions will lose the entire premium paid. Currently, delta for the CSCO options sits at 0.51, denoting just over a 1-in-2 chance of an in-the-money finish.

Today's call buying is business as usual for CSCO traders. During the past 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 3.47 calls for every put. The resultant 50-day call/put volume ratio of 3.47 ranks higher than 89% of comparable readings from the last 12 months, suggesting traders have picked up calls over puts at an accelerated clip in recent months.

In a similar vein, 20 out of 28 analysts following CSCO have doled out a rating of "buy" or better, compared to just eight "holds" and not a single "sell" or worse recommendation. What's more, the consensus 12-month price target of $23.60 sits over 11% higher than the current share price.

This optimism is fairly surprising, considering Cisco Systems, Inc. (NASDAQ:CSCO) is little better than flat on a year-over-year basis. Moreover, from a relative-strength perspective, the stock has underperformed the broader S&P 500 Index (SPX) by nearly 19 percentage points during the past three months. All things considered, if CSCO continues to struggle on the charts, an unwinding among the option bulls -- or a round of analyst downgrades and/or price-target cuts -- could follow, pressuring the shares lower.


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